Capital Gain and or gift tax on gift of equity - Kerry Kerstetter - The Tax Guru
I live in PA. My husband and I are going to be purchasing my grandmother's house from my mother and uncle who inherited it when my grandmother passed away. We are purchasing it for 75,000 with them giving us a gift of equity of 35000 (Purchase price of $110,000(appraised value of the home)...Will they have to pay capital gain on that? Or will we? If either party does, how much is capital gain tax typically?
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david ingram replies:
If they have just inherited it four months ago and you are buying it now and it has not gone up in value, there would niot be any capital gains tax payable by your mother and uncle,.
If they inherited it two years ago and it has gone down in value since, there will not be any capital gains tax.
If they are giving you $35,000, the rules today are that they can give you up to $12,000 each with no gift tax. therefore, your mother can give you up to $12,000 and your husband up to $12,000 and your uncle can do the same thing so there is no gift tax problem nor is there the need to file a form.
If they inherited it five years ago and it has doubled in value (or any other amount), they can expect to pay 10% capital gains tax on their share of the increase.
The following comes from Kerry Kersetter's very excellent Q & A forum on US tax. I recommend it wholeheartedly and you can find the newsletter uitself at www.taxguru.net.
The following is two days old on his site.
Gift Tax Exemptions
Q:
Subject: Questiion about the gift tax and exclusions
You really need to be discussing any kind of gifting program with your own personal professional tax advisor because there are many ways to accomplish whatever it is you want to.
However, I can clear up some of your misunderstandings.
First is the issue of gifts versus bequests. Gifts are only made while a person is alive. Once the person passes away, gifts are no longer possible. Bequests, per the instructions in his/her will or living trust, are the way items are passed from the deceased to whomever s/he wants to transfer things to.
This is an important distinction because a person can give away up to one million dollars worth of assets above the annual tax free amount while s/he is alive. If more than that is given while the person is alive, s/he must file a gift tax return (709) and pay gift tax to IRS.
After a person passes away, s/he is subject to the estate (aka Death or Inheritance) tax. Under this tax system, the amount of the estate that is not subject to any estate tax varies depending on the year in which the person passes away. As you can see on the chart on my website, people passing on during 2007 have a two million dollar exemption.
The way this interacts with the one million dollar lifetime gift tax exclusion is that, on the Estate Tax Return (706), the total amount of the lifetime gifts used during the person's lifetime is added back to the gross estate's value. The net effect is basically to reduce the tax free exclusion from the estate tax. For example, if $500,000 of tax free gifts had been used by someone who passed away in 2007, this would be added to the value of his taxable estate on the 706. After reducing the estate tax by the credit for the $2,000,000 allowance, it works out to be the same as if he only has $1,500,000 eligible for exemption from estate tax. The actual calculation is a little trickier than this, but it's an easy way to understand the concept.
So, your concern about the unused portion of the million dollar lifetime gift allowance is moot. Whatever hasn't been used while the person was alive will end up resulting in a higher exemption from the estate tax. For example, someone who passed away in 2007 without utilizing any of his million dollars in tax free gifts will have the full $2,000,000 available for his estate tax.
In regard to the annual gifting allowance and the lifetime exclusion, your explanation is the more accurate one. Someone making gifts that don't exceed the limit of $12,000 to any one person during any calendar year will not have to file any gift tax returns and will not have used up any of his/her million dollar lifetime allowance.
Someone who does give any single person more than the $12,000 during a single calendar year will have to file a gift tax return to report that and show how much of his/her lifetime exclusion is being used up at that time, as well as how much of the million dollars is remaining. Only the amount above the annual allowance needs to be deducted from the lifetime exclusion. As in your example, someone giving another person $30,000 during a single calendar year would only have to claim $18,000 as coming off of the million dollar lifetime exclusion. Each person is required to keep a running tally of how much of that million dollars has been used up during his/her lifetime so that the person preparing the final estate tax return can show the final cumulative amount.
As I said at the beginning, there are a number of very common gifting strategies, such as gift splitting between spouses, loans and debt forgiveness, and dividing gifts up between different family members, that can easily allow people to avoid having to ever dip into their lifetime exclusion at all These need to be planned out with the assistance of a professional tax advisor.
I hope this helps you understand this topic a little better and how important it is to have professional assistance before actually doing anything in this area.
Good luck.
Kerry Kerstetter �
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david ingram replies:
If they have just inherited it four months ago and you are buying it now and it has not gone up in value, there would niot be any capital gains tax payable by your mother and uncle,.
If they inherited it two years ago and it has gone down in value since, there will not be any capital gains tax.
If they are giving you $35,000, the rules today are that they can give you up to $12,000 each with no gift tax. therefore, your mother can give you up to $12,000 and your husband up to $12,000 and your uncle can do the same thing so there is no gift tax problem nor is there the need to file a form.
If they inherited it five years ago and it has doubled in value (or any other amount), they can expect to pay 10% capital gains tax on their share of the increase.
The following comes from Kerry Kersetter's very excellent Q & A forum on US tax. I recommend it wholeheartedly and you can find the newsletter uitself at www.taxguru.net.
The following is two days old on his site.
Gift Tax Exemptions
Q:
Subject: Questiion about the gift tax and exclusions
Hello,
My sister and I have a question about the gift tax exclusions.
This year the max. gift is $12,000 per person annually. But there is a $1,000,000 "Lifetime exclusion"
My sister belives that means that the doner can give a lifetime of 1 million in gifts (which includes the 12k per person annually) and anything over that is taxed. But I think that the 1 million lifetime exclusion means that whatever is over the annual 12k per person is deducted from the 1million. So if someone is given 30k in one year as a gift - 18k (30-12) is deducted from the lifetime one million.
Could you please clarifry this for us?
Also, if the 1 million exemption is not reached by the time somone dies- can it be given after death without being taxed? on top of the 2 million Estate exemption from taxes?
Thank You so much,A:
You really need to be discussing any kind of gifting program with your own personal professional tax advisor because there are many ways to accomplish whatever it is you want to.
However, I can clear up some of your misunderstandings.
First is the issue of gifts versus bequests. Gifts are only made while a person is alive. Once the person passes away, gifts are no longer possible. Bequests, per the instructions in his/her will or living trust, are the way items are passed from the deceased to whomever s/he wants to transfer things to.
This is an important distinction because a person can give away up to one million dollars worth of assets above the annual tax free amount while s/he is alive. If more than that is given while the person is alive, s/he must file a gift tax return (709) and pay gift tax to IRS.
After a person passes away, s/he is subject to the estate (aka Death or Inheritance) tax. Under this tax system, the amount of the estate that is not subject to any estate tax varies depending on the year in which the person passes away. As you can see on the chart on my website, people passing on during 2007 have a two million dollar exemption.
The way this interacts with the one million dollar lifetime gift tax exclusion is that, on the Estate Tax Return (706), the total amount of the lifetime gifts used during the person's lifetime is added back to the gross estate's value. The net effect is basically to reduce the tax free exclusion from the estate tax. For example, if $500,000 of tax free gifts had been used by someone who passed away in 2007, this would be added to the value of his taxable estate on the 706. After reducing the estate tax by the credit for the $2,000,000 allowance, it works out to be the same as if he only has $1,500,000 eligible for exemption from estate tax. The actual calculation is a little trickier than this, but it's an easy way to understand the concept.
So, your concern about the unused portion of the million dollar lifetime gift allowance is moot. Whatever hasn't been used while the person was alive will end up resulting in a higher exemption from the estate tax. For example, someone who passed away in 2007 without utilizing any of his million dollars in tax free gifts will have the full $2,000,000 available for his estate tax.
In regard to the annual gifting allowance and the lifetime exclusion, your explanation is the more accurate one. Someone making gifts that don't exceed the limit of $12,000 to any one person during any calendar year will not have to file any gift tax returns and will not have used up any of his/her million dollar lifetime allowance.
Someone who does give any single person more than the $12,000 during a single calendar year will have to file a gift tax return to report that and show how much of his/her lifetime exclusion is being used up at that time, as well as how much of the million dollars is remaining. Only the amount above the annual allowance needs to be deducted from the lifetime exclusion. As in your example, someone giving another person $30,000 during a single calendar year would only have to claim $18,000 as coming off of the million dollar lifetime exclusion. Each person is required to keep a running tally of how much of that million dollars has been used up during his/her lifetime so that the person preparing the final estate tax return can show the final cumulative amount.
As I said at the beginning, there are a number of very common gifting strategies, such as gift splitting between spouses, loans and debt forgiveness, and dividing gifts up between different family members, that can easily allow people to avoid having to ever dip into their lifetime exclusion at all These need to be planned out with the assistance of a professional tax advisor.
I hope this helps you understand this topic a little better and how important it is to have professional assistance before actually doing anything in this area.
Good luck.
Kerry Kerstetter �
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